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INCLUSIVE INNOVATION Improving the Lives of Hundreds of Millions of People in India by Accelerating the Growth of BOP Markets in MedTech and Clean Energy Presented at SOCAP/Europe May 2011 Omidyar Network and the Omidyar Network logo are trademarks of Omidyar Network. Other trademarks are the property of their respective owners. www.omidyar.com

Omidyar Network Presents Inclusive Innovation for India BOP

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Page 1: Omidyar Network Presents Inclusive Innovation for India BOP

INCLUSIVE INNOVATION Improving the Lives of Hundreds of Millions of People in India by Accelerating the Growth of BOP Markets in MedTech and Clean Energy

Presented at SOCAP/Europe May 2011

Omidyar Network and the Omidyar Network logo are trademarks of Omidyar Network. Other trademarks are the property of their respective owners. www.omidyar.com

Page 2: Omidyar Network Presents Inclusive Innovation for India BOP

Results to-date

•  Raising $50 million early stage MedTech fund

•  Investment discussions with 5-6 MedTech opps

•  Considering 2-3 specific grant proposals for public health institutions

•  Invested in Agni, bio-coal firm

•  Investment discussions with 3 Clean Energy entrepreneurs

•  Insights on opportunity / model for market dev’t

▪  ON and McKinsey worked together to define and analyze the market landscape, interview over 50 entrepreneurs, and speak to dozens of experts ▪  Got terrific guidance from

great Steering Committee (e.g., Antony Bugg-Levine, Michael Chu, Brian Trelstad) ▪  Focused on specific market

interventions that could accelerate market growth ▪  Discussed issues with key

policy-makers

2

Study approach

▪  How big is the opportunity? ▪  How many / who are the

entrepreneurs targeting the BOP MedTech and Clean Energy markets?

▪  How strong are their business models? Can they really help the poor? Why?

▪  What barriers make it difficult to scale?

▪  How can we best help them?

▪  What resources will be required?

Key issues

STUDY APPROACH FOCUSED ON ENTREPRENEURS AND MARKET ECOSYSTEM FOR MEDTECH AND CLEAN ENERGY

Page 3: Omidyar Network Presents Inclusive Innovation for India BOP

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INCLUSIVE INNOVATION: IMPROVING LIVES OF HUNDREDS OF MILLIONS IN INDIA AND GENERATING ATTRACTIVE RETURNS BY ACCELERATING THE GROWTH OF BOP MARKETS IN MEDTECH AND CLEAN ENERGY

Many entrepreneurial innovators are seeking to serve India’s vast BOP markets for MedTech and Clean Energy; they have the potential to generate massive social impact and deliver attractive financial returns

Multiple market development efforts (such as early stage financing, industry associations, certification/standards, and specialized training) are required for these entrepreneurial innovators to achieve their full potential and to develop vibrant market ecosystems that create value for all stakeholders

Inclusive innovation – wherein impact investors, commercial investors, philanthropies, development agencies, and governments collaborate to support innovators and invest in market development – can overcome these challenges and accelerate the growth of BOP MedTech and Clean Energy markets

1

2

3

Page 4: Omidyar Network Presents Inclusive Innovation for India BOP

4 SOURCE: McKinsey Global Institute; Global Insight; EIU

INDIA’S BOP REPRESENTS 835 MILLION PEOPLE AND $360 BILLION IN DISPOSABLE INCOME

Household income USD 2010 nominal

Household income USD 1990 PPP

Disposable Income Billion USD 2010 nominal

>$8 >$17.03

$4 - $8 $8.52 - $17.03

$2 - $4 $4.26 - $8.52

$1.25 - $2 $2.45 - $4.26

<$1.25 <$2.45

Population Millions

85

25

419

415

246

101

257

320

241

294

BOP

Page 5: Omidyar Network Presents Inclusive Innovation for India BOP

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SIGNIFICANT LATENT DEMAND AMONG INDIA’S BOP POPULATION

SOURCE: ESRC report; BP Statistical Review 2008, China Year Book 2009-09, Indian Banks Association, RBI, BIS

Healthcare

Energy

Education

Finance

Communication

1 Latent demand calculated from comparable benchmarks, viz. total demand of China

= Total demand Current demand Latent demand1 +

Tele density per thousand

233

224 (23%)

124 (53%)

Bank Loans / GDP per thousand

1,684

109 (47%)

1,066 (63%)

Youth literacy per thousand (15-24 olds)

988

129 (16%)

764 (77%)

Per capita annual electricity consumption (Mwh/year)

789

618 (37%)

440 (45%)

Per capita healthcare spend (PPP USD 2007)

980 540 (55%)

660 (84%)

100% =

Latent demand (%)

53

63

23

45

16

Page 6: Omidyar Network Presents Inclusive Innovation for India BOP

6 Source: GlobalData; BMI; EIU; Cygnus

BOP 2020 MedTech Market Size USD billion

2020 market (optimistic case)

~10.0

Effect of market development

2.00-3.50

2020 market (base case)

~6.50

Effect of frugal innovation

~2.50

Secular growth

~2.75

2010

~1.25

USD 10 billion market equal to entire Indian

pharmaceutical industry in 2007

BOP DEMAND CAN YIELD VAST MARKETS

Page 7: Omidyar Network Presents Inclusive Innovation for India BOP

0

2010 Size Percent of Indian Med Tech Market

0.095 9 0.085 8 0.075 7 0.065 6 0.055 0.005 5 0.045 4 0.035 3 0.025 22 2 0.015 14 1 0

Telemedicine

mHealth

Wound Care

Surgical Equipment

Patient Monitoring

Projected Growth 2010-2015 %

9

8

7

6

5

4

3

16

15

14

13

12

11

10 3. Orthopedic

Ophthalmic

Neurology

6. Nephrology and Urology

5. In Vitro Diagnostics

Hospital Supplies

7. Healthcare IT ENT

Endoscopy

Drug Delivery

4. Diagnostic Imaging

1.Diabetes

Dental

2. Cardiovascular

Anesthesia/ Respiratory

7 PRIORITY AREAS ARE MATERIAL AND FAST GROWING …

SOURCE: Global Data

Priority sectors

Page 8: Omidyar Network Presents Inclusive Innovation for India BOP

8 SOURCE: Global Insight

A THRIVING BOP MEDTECH INDUSTRY WOULD IMPACT HUNDREDS OF MILLIONS OF LIVES

Number of treatments per person per year for total BOP market (N=835 mn)

14X

BOP annual per capita treatments in 2010

Additional treatments due to secular growth

Additional treatments due to frugal innovation

BOP 2020 annual per capita treatments (base case)

Additional treatments due to market development

Effect of product innovation

Page 9: Omidyar Network Presents Inclusive Innovation for India BOP

9

SIMILARLY, CLEAN ENERGY IS A VAST MARKET TOUCHING HUNDREDS OF MILLIONS OF LIVES

Potential market 2020 USD billion

SOURCE: McKinsey analysis 1 Equity capital is roughly one-third to one-half the total capital required

4.5-5.0 ~0.5 ~0.1 0.9-1.0 6.0-6.5

Lives touched Million

~40 ~25

~465

~705

~175

Capital required USD million

~150 ~2,500 ~45 ~250 ~2,900

Fuel sources

Electricity generation and distribution Devices

Community micro grids

Household solutions

Page 10: Omidyar Network Presents Inclusive Innovation for India BOP

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MedTech– more than 40 Focused on providers & medical devices

MANY ENTREPRENEURIAL INNOVATORS ARE SEEKING TO DEVELOP THESE MARKETS

SOURCE: Discussions with entrepreneurs; web searches

Clean Energy – more than 50 Focused on devices like solar lanterns & community micro grids

Page 11: Omidyar Network Presents Inclusive Innovation for India BOP

11

Microfinance and telecom have successfully penetrated the BOP

The growth was sparked by entry of new entrepreneurs …

Microfinance Microfinance

Telecom

Teledensity Percent

No. of subscribers Millions

Telecom

… who initiated disruptive innovation in the market

Telecom Microfinance

Product design

▪  Small ticket loans, mainly for income generation

▪  Group lending

▪  Differently priced recharge vouchers

▪  Tariff cutters ▪  Minute packs

Distri- bution

▪  Field agents reaching individual households (SKS Microfinance reaches >100,000 villages)

▪  Extensive distribution network – 1 re-seller for 1,000 individuals

Efficiency

▪  Simple replicable models for expansion –  Training –  Stopwatch-

based method for field operations

–  Streamlined information management

▪  Outsourcing of network and IT management

▪  Over the air electronic remote recharging

▪  Sharing of cell towers

Cumulative outreach of MFIs Million clients

LEARNING FROM TELECOM AND MICROFINANCE, ENTREPRENEURS ARE PURSUING DISRUPTIVE INNOVATIONS

2006 2003

6x

2010

*

2000 2010 2000

22x

225x

SOURCE: Expert interviews, Web searches

Page 12: Omidyar Network Presents Inclusive Innovation for India BOP

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FORUS HEALTH, A SMALL ENTREPRENEURIAL COMPANY, IS DEVELOPING INNOVATIVE DEVICES

SOURCE: Interviews with Forus management; Company website

Forus Health has two product offerings

1. Diagnostic device that can detect 5 major eye ailments that cause 90% of blindness (diabetic retina, cataract, glaucoma, cornea, and refraction problems) called 3nethra which costs 1/10th of existing products

2. Affordable dialysis solution called Renall (USD 7 per session with new membranes compared to existing USD 35 with used membranes)

3nethra’s innovative features: ▪  Single, portable, non-

invasive, non-mydriatic eye pre-screening device

▪  Provides an automated “Normal – Need to See a Doctor” Report

▪  Can send report thru mobile network for remote diagnosis

Page 13: Omidyar Network Presents Inclusive Innovation for India BOP

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DLIGHT, A PORTFOLIO COMPANY, IS ONE OF THESE ENTREPRENEURIAL INNOVATORS

SOURCE: Company interviews; d.light web site

A day in the life of Monika Singh, 14 year old, UP

“My d.light lamp is much brighter than the kerosene lantern. Because of the good quality light, we are more interested in studying”

d.light has revolutionised the life of Monika’s family ▪  With d.light, Monika and her two siblings enjoy

brighter light for studies at night ▪  Shifting from kerosene lamps have saved them

from its smoke and soot ▪  Her father uses another lantern to farm at

night, and her mother uses one for cooking

Page 14: Omidyar Network Presents Inclusive Innovation for India BOP

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MANY MARKET DEVELOPMENT CHALLENGES INHIBIT GROWTH OF MARKET ECOSYSTEM

End-user support ▪  Product certification ▪  Consumer protection ▪  Education

Productive capacity ▪  Training ▪  Health ▪  Safety

Entrepreneurial ventures ▪  Products and services ▪  Delivery model ▪  Production costs

Consumer wealth ▪  Initial condition ▪  Accumulated wealth

Hard infrastructure ▪  Transport ▪  Fulfillment ▪  Payment services

Capital ▪  Multiple stages ▪  Supplier network

Soft infrastructure ▪  Industry associations ▪  Industry standards ▪  Regulations

BOP Consumer (Demand)

BOP Business (Supply)

Market development challenges

UNCLEAR MARKET STANDARDS

INSUFFICIENT RISK CAPITAL

CONSUMER EDUCATION & DISTRUST

NO ACCESS TO CREDIT AND ERRATIC INCOME LACK OF

TECHNICAL SKILLS

INADEQUATE INFRASTRUCTURE

Page 15: Omidyar Network Presents Inclusive Innovation for India BOP

15 SOURCE: Press reports

Microfinance sector is stalling due to reported malpractices High reported incidence of malpractice… … and regulatory intervention

▪  AP MFI (Regulation of money lending Act) - 2010 –  MFI registration mandatory for operation –  Cap on number of loans per borrower –  Penalties for violation

▪  Malegam Committee recommendations –  Min. HH income of Rs.50,000 for giving loans –  Ceiling of Rs. 25,000 on individual loans –  RBI to draft Customer Protection Code; to be

adopted by all MFIs –  Responsibility for monitoring of compliance

shared by MFIs, industry associations, banks & RBI

Similar regulation and monitoring is needed in medical technology and clean energy sectors

Certification of technologies mandatory

Treatment only through standard protocols

Specification of standards for small-scale suppliers of electricity (e.g.,

micro-grid solution providers)

“Unrestrained lending by MFIs”

“Harassment by loan collection officers”

“70 people in AP committed suicide over 6 months to escape payments”

… leading to public backlash…

Outcry

▪  “Do not pay MFI loans”

Defaults ▪  Repayment rates

coming down drastically, in some places down to 10% (vs 90%+ historically)

LACK OF MARKET STANDARDS AND CONSUMER DISTRUST HAS CONTRIBUTED TO A MAJOR CRISIS IN MICROFINANCE IN INDIA

Page 16: Omidyar Network Presents Inclusive Innovation for India BOP

Potential revenue growth

5.25-8.75

0.8-1.8

2.0-4.4

Investment required

Equity2

1.2-2.6

Debt2

SOURCE: McKinsey Global Institute; Global Insight

Investment required

1 Incremental capital to sales ratio is sales growth divided by CapEx, based on average of India and China over past 5-15 years; does not include financial investments to fund operating expenses in early-stage, loss-making companies

2 ~60% equity to assets ratio based on the financial statements of select Indian medical technology plaers

USD billions

Incremental capital to sales ratio of 40-50%1

SUBSTANTIAL EQUITY CAPITAL IS REQUIRED BY 2020 TO GROW THE INDUSTRY – MEDTECH EXAMPLE

Page 17: Omidyar Network Presents Inclusive Innovation for India BOP

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Early stage financing

Growth capital financing Public market financing

INCLUSIVE INNOVATION IS REQUIRED TO ACCELERATE GROWTH OF BOP MARKET ECOSYSTEM

BOP market size Large highly

competitive ecosystem with substantial capital investment

3

Moderately competitive ecosystem with limited capital investment

2

Small monopolistic ecosystem with minimal capital investment

1

Impact investors (equity & grants)

Commercial capital providers (equity & debt)

3-5 years 5-8 years

Time Gov’t, development agencies, philanthropic capital for dealing with market development challenges ▪  Public goods ▪  Subsidies ▪  Dealing with externalities

Page 18: Omidyar Network Presents Inclusive Innovation for India BOP

18

Market development challenge

Solution

•  Conduct social marketing with Public Health agencies –  Prioritise health conditions that require increased awareness – Run nation-wide awareness campaigns (for example, TV, radio, print advertising, events) –  Partner with local bodies to implement programmes on the ground

Consumer education 1

•  Set up academic and vocational institutes for training of health workers – Coordinate with emerging BoP healthcare providers to develop modular health worker

curricula – Match health workers with job or franchise opportunities in BOP providers

Lack of technical skills

2

•  Establish institute for Healthcare Excellence – Create evidence-based public health guidelines – Create evidence-based clinical protocol

Unclear market standards I

3

•  Set up Medical Technology Certification Institute – Certify emerging medical technologies for Indian conditions –  Funded by manufacturers to make it self-sustaining

Unclear market Standards II

4

•  Agree on standards for micro health insurance –  Franchise out semi-standard community health insurance programmes

to community-based organisations – Manage the back-end of community-based insurance schemes (for example, reinsurance,

quality management)

No access to credit 5

SOURCE: Expert interviews; PATH; Public Health Foundation of India

GOVERNMENTS, DEVELOPMENT AGENCIES AND PHILANTHROPISTS PLAY KEY ROLE IN OVERCOMING CHALLENGES – MEDTECH EXAMPLE

Page 19: Omidyar Network Presents Inclusive Innovation for India BOP

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End-user support ▪  Product certification ▪  Consumer protection ▪  Education

Productive capacity ▪  Training ▪  Health ▪  Safety

Entrepreneurial ventures ▪  Products and services ▪  Business model ▪  Costs

Consumer wealth ▪  Initial condition ▪  Accumulated wealth

Hard infrastructure ▪  Transport ▪  Fulfillment ▪  Payment services

Capital ▪  Multiple stages ▪  Supplier network

Soft infrastructure ▪  Industry associations ▪  Industry standards ▪  Entry / exit

BOP Consumer (Demand)

BOP Business (Supply)

Training

Regulation

Crowd in capital (for profit)

Social marketing

Key interventions

RBI’s ‘project financial literacy’ to increases financial awareness

▪  Allowing NGOs to act as MFI agents ▪  Permitting composite loan-insurance products ▪  Allowing MFIs to act as banking correspondents

▪  Sa-Dhan: Industry associations for networking, advocacy and capability building

▪  SMART campaign certification for MFIs upholding client protection principles

▪  Priority sector lending ▪  Development capital ▪  For profit investment

ACCION’s training centre for front-line officers & middle management in MFIs

INCLUSIVE INNOVATION HELPED IN GROWTH OF MICROFINANCE IN INDIA

Page 20: Omidyar Network Presents Inclusive Innovation for India BOP

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INCLUSIVE INNOVATION REQUIRED IN CLEAN ENERGY

End-user support ▪  Product certification ▪  Consumer protection ▪  Education

Productive capacity ▪  Training ▪  Health ▪  Safety

Entrepreneurial ventures ▪  Products and services ▪  Business model ▪  Costs

Consumer wealth ▪  Initial condition ▪  Accumulated wealth

Hard infrastructure ▪  Transport ▪  Fulfillment ▪  Payment services

Capital ▪  Multiple stages ▪  Supplier network

Soft infrastructure ▪  Industry associations ▪  Industry standards ▪  Entry / exit

BOP Consumer (Demand)

BOP Business (Supply)

Training

Regulation

Crowd in capital (for profit)

Social marketing

Key interventions

▪  Institution to create industry standards certify product quality

Training institutes for handling technicians in electricity generation units

Coordinated financing with lock in to simultaneously stimulate demand and supply

BoP clean energy legal access cell

Advocacy

A US$6 BN MARKET

Page 21: Omidyar Network Presents Inclusive Innovation for India BOP

INCLUSIVE INNOVATION – STAKEHOLDERS COLLABORATING TO HELP BUILD OUT THE BOP MARKET ECOSYSTEM

21

• BOP consumers receive innovative, affordable products and services

• Members of the BOP are engaged as producers (i.e., employees or suppliers)

• Entrepreneurs overcome market barriers and build great businesses

•  Investors get competitive returns

• Donors and governments work together to build sustainable, fair ecosystems

•  Impact investors: focus on early stage investments, but demand commercial returns

• Philanthropists and development agencies: support, not distort market development – need a careful, light touch

• Governments: ensure responsive and efficient regulatory regime

• Entrepreneurs: build effective industry associations and collaborate to build soft infrastructure

Inclusive Innovation benefits What to do